Self-Employment Dynamics and Returns To Entrepreneurship

Earning money can be a tedious task, but there are many options for making money. You can work with a company and get paid for the work done, or you can choose to be the owner of your business or an entrepreneur.

There are several career options available. If we do an analysis of the career path chosen by individuals across the globe, there are numerous examples where owners of small businesses have shifted to full-time jobs for an organization.

Similarly, employees who worked for an organization have gone on to pursue their dream of being a leading entrepreneur. It is obvious that entrepreneurs who have not been successful in at least five years have gone back to pursue full-time jobs under a company.

What Drives the Shift from Paid Work to Entrepreneurship?
There are several factors that drive people to shift their career path from paid work to entrepreneurship. However, one of the key factors is return or earnings. Individuals who are not satisfied with low earnings associated with paid work, often shift to self-employment to get a higher income.

Similarly, entrepreneurs who are not confident of making it big after a few years of struggle get back to the good old paid work to sustain their livelihood.

Majority of the paid workers gain good experience and move to self-employment as an experimental trial that can be reversed by getting back to full-time jobs.

Another key motivating factor that drives entrepreneurship can be the policies and the business environment that encourage individuals to become entrepreneurs.

Note – As per the statistics a median entrepreneur earns far less than a paid worker, but successful and established entrepreneurs get multiple returns as compared to an average paid worker.

Making a Choice
Before choosing between paid work and entrepreneurship, it is advisable to understand the lifetime earnings associated with entrepreneurship as opposed to paid work. According to the statistics, around 72 percent of the employees who work in the entrepreneurship sector have their own business. Whereas, around 10 percent of the paid workers from other sectors are entrepreneurs.

Thus, making a choice between entrepreneurship and paid work will depend on several factors like- experience in the specific sector, knowledge, willingness to get additional income, the area of specialization and more.

Earnings of a Paid Worker Vs Earnings of an Entrepreneur
Determining the earnings of a paid worker is quite simple as he/she is dependent on wage or a fixed income with limited variables like incentives, bonuses etc. Paid workers receive a limited amount of hike based on promotions, appraisal/ increment, job switch etc.

When it comes to entrepreneurship determining the earnings of an entrepreneur is a complex phenomenon and depends on several factors like the demand for the product, market potential, market reputation, projects in hand etc.

While determining the earnings of an entrepreneur, experience plays a major role. According to the statistics, a worker with ten years of work experience in a specific sector (before moving to entrepreneurship) is likely to earn 20 percent more as opposed to a budding entrepreneur with no experience.

Similarly, the salaries paid workers with ten years of experience are likely to rise by 42 percent. Indeed, a highly paid worker with experience is likely to experience a substantial drop in income after shifting to entrepreneurship.

What Is the Key Challenges Faced by an Entrepreneur?
Entrepreneurship is indeed a bold step that requires lots of skills and patience. The key factor that determines the continuance of entrepreneurship, or shifting to paid work depends on the time it takes to reach breakeven.

Breakeven is a state when a company balances between profit and loss or reaches a stage where there is no profit or no loss. It is a point where the generated revenue covers up the running cost of a business, and a company runs into a zone where net profit is zero.

Breakeven analysis is important for an entrepreneur as it gives him/her an idea of the growth of sales needed to reach the desired profit level.

Most entrepreneurs lose hope as they keep making losses and never reach the breakeven point. Thus, deciding to shift back to paid work.

You Need Not Be an Entrepreneur to be Self- Employed
According to statistics, paid workers are a dominant entity in the market. Individuals who opt for self-employment usually choose entrepreneurship. Around 82 percent of the self-employed individuals are entrepreneurs, but the rest are contractors, lawyers, freelancers etc.

Policies Impacting Choice of Self Employment/ Entrepreneurship
Among all the available options, entrepreneurship or self-employment is a welcome transition. The ongoing policies have a strong impact in shaping the decision of a paid worker, or a recently qualified student to pursue entrepreneurship/ self-employment.

Policies educate individuals on entrepreneurship and promise a life changing experience. Similarly, a few policies offer attractive subsidies on starting a specific venture and impact the decision of budding professionals.

The alteration in taxes clearly change the earning pattern and inspire entrepreneurship. Example – Low taxes imposed by the government on green energy will boost the profitability of windmills and solar cell manufacturing companies. The initiative will encourage entrepreneurship as many wage earners will plan to build their businesses and deal with products related to green energy.

An Apt Summary
It is indeed true that paid workers have a fixed and guaranteed income as opposed to self-employed individuals or entrepreneurs who experience a huge uncertainty in their earning. However, shifting from paid work is indeed a wise option, and in case of uncertainties, one can easily get back to the good old paid work. The option limits the downside risk and is worth an experiment.

The pattern that is exhibited (movement from paid work to self-employment and vice versa) is consistent and dynamic. Indeed, the lifetime earnings of self-employed entrepreneurs are much higher than the professionals working as paid workers, and the uncertainty associated with entrepreneurship makes it an attractive proposition.

An experienced paid worker who experiences regular salary hikes in jobs may not like the idea or self-employment, but budding professionals who have understood the earning potential of self-employment and are at a young age are more likely to earn big as entrepreneurs.

Note –
The success as a self-employed professional/entrepreneur will vary from one person to another depending on the choice of business, experience, government policies etc.

Author’s Bio: Naval Goel is the founder of PolicyX.com which was established in the year 2013. Naval has an expertise in the insurance sector. Before venturing into the field of entrepreneurship, Naval had worked with top companies like AIG in New York as a part of their corporate team. He is also an Associate Member of the ‘Indian Institute of Insurance’, Pune.